China Co-Development and Design Patents

We have been writing a lot recently about design patents. In the old days, our China contract manufacturing clients normally did not use Chinese design patents. The reason is simple. Chinese design patent registration requires absolute novelty. If the design has been revealed in any way, registration is not permitted. Since our traditional contract manufacturing clients were normally working with a design that had already been marketed in America, Europe or Australia, registration of a Chinese design patent was not possible.*

However, with the rise of product co-development in China, the use of design patents has become essential. The co-development process assumes that the resulting product design will be entirely new. So long as secrecy is maintained during the design process, the design can then be registered for protection as a design patent in China. All foreign companies working on co-design in China should therefore be aggressively using the Chinese design patent system to protect their product designs.

The utility of a design patent applies in two quite different settings. In the first setting, the design patent is used as a defense against knock-off manufacturing by third parties. In the second setting, the design patent is used to make clear the rights of the foreign entity and the Chinese factory in the co-designed product.

In preventing third party factory knock offs, the most powerful tool is a Chinese invention patent. However, in most cases of co-development, invention patent protection is not an option due to technical or cost factors. Where there is no patent protection, other Chinese factories are free to manufacture knock-off copies of the product. If you have a good contract with your Chinese factory, this leads to the odd situation where your factory cannot independently manufacture the product, but every other factory in China is free to do so.

It is important to be clear about this situation. Where there is no Chinese patent protection, it is perfectly legal for an unrelated Chinese factory to knock-off the product. Only some form of patent can stop the knock-off. That is, absent patent protection, a knock-off does not constitute infringement. So where no invention patent applies, a design patent is a powerful tool. If the design is registered as a patent, the owner of the patent can prevent any other factory in China from making a product using that design. The patent owner can also register with customs, preventing the export of the knock-off product.

For this reason, in the co-development process, both the U.S. entity and the Chinese factory have a strong incentive to register a design patent so as to prevent knock offs from third party manufacturers. This then leads to the second issue: who will own the design patent? As I pointed out in China and The Internet of Things: Who Owns What? where the product is produced in a co-development process, the question of who owns the design is fundamentally unclear. Far too many foreign companies mistakenly believe that they own the design because they came up with the design or because they made some or all of the payments for the design.

This belief is entirely mistaken.

The default rule in the case of patents is that absent a formal agreement to the contrary, whoever did the work owns the patent. It is therefore essential for the Chinese factory and for the foreign entity to make a formal, written decision on who has the right to register the design patent. But this simple agreement is not enough. Once the foreign entity secures the right to register the design patent, it must be sure to register that design before the product is revealed to the world because any form of disclosure of the design will destroy the right to register. Sale is not required. A promotional photo published on the web or in a trade journal or trade show brochure is sufficient to constitute disclosure that defeats the right to register the design patent.

A design patent is particularly useful in the most difficult co-development setting where the foreign party design is being built on top of technology proprietary to the Chinese factory. In that setting, it is quite clear that the foreign party cannot assert ownership to the underlying technology of the co-developed design. However, the foreign party can and should assert ownership over the unique design of the co-developed product. Though a contract with the Chinese factory will establish who has the right to the unique design, the only way the foreign party can establish actual ownership of the design is by registering a design patent.

Finally, foreign parties should take note of one of the big dangers in doing product co-development in China. This is the same issue that arises continually in the China trademark area: if you do not do it, they will. That is, where there is a co-development project, if you do not register the design patent in your own name, it is likely that the Chinese factory (or its owner or someone connected with the company or the owner) will do the registration. You will not find out about it until either a) you see your own product being sold on Amazon or eBay or b) you try to move your production to a new factory and discover this is impossible.

The only way to avoid this kind of disaster is to take action on your own. Our China lawyers get at least a call a week from someone who has lost their IP to a Chinese company because they never registered it. If you do not take the responsibility of protecting your intellectual property in China, I can assure you that no one else will.

*Technically, because China design patents are not reviewed, it is very easy to register one, but if it isn’t novel, the registration will — if it is ever challenged — be deemed invalid.

Steve focuses on assisting foreign companies in doing business in and with China. He prides himself on working in the “real” China: the world of factories, fish plants, and farms that lie outside of Beijing and Shanghai. Having mastered the Chinese language and legal system, Steve’s unique expertise makes him an invaluable resource to our clients.

About China Law Blog

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.